June 1 Snapshot
The Bottom Line: The quick rise in mortgage rates has substantially eroded home affordability and the San Diego County housing market is rapidly cooling. It all boils down to the monthly payment. When the monthly payment climbs out of reach for many home buyers, demand cools. The housing frenzy is quickly coming to an end. Sellers need to be careful in navigating the new housing landscape. Carefully pricing is fundamental in order to find success.
In May of 2021, a gallon of gas cost $4.07. In January of this year, it had increased to $4.59, a rise of 52 cents in 8 months. It climbed to $5.66 a gallon in April, and then to $6.17 in May. That is a $1.58 jump in 4 months. Everyone is acutely aware of soaring prices at the pump. As consumers feel the strain in their monthly budgets, the rising fuel cost will begin to impact discretionary spending.
Mortgage rates have experienced a similar fate, climbing from 2.78% last August to 3.25% by the start of this year. They then jumped to 4.95% in April and sit at 5.25% today. This two-point rise since ringing in the New Year sidelined many potential buyers as home affordability has impacted the ability for many to qualify and purchase a home.
To understand where this weaker demand is coming from it is necessary to consider where interest rates and incomes have been historically and their impact on affordability. In 1980, the average mortgage rate was 13.75%, the median income was $18,000, and the median detached sales price was $94,000. That meant that the monthly housing payment was 60% of a homeowner’s income. Rates continued to drop, and incomes climbed decade after decade. In 2000, mortgage rates were at 8%, the median income grew to $48,000, and the median detached sales price had blossomed to $270,000. Yet, the monthly payment was only 39% of a homeowner’s income. It swelled to 57% in 2007, just prior to the start of the Great Recession, and dropped to 28% in 2012 as housing began to climb once again. In 2020 and 2021, even as the median price of a home had rocketed to record levels, the monthly payment was at 34% and 39% due to historically low mortgage rates. Affordability was not an issue as mortgage rates had dropped to record lows. Flash forward to today’s 5.25% mortgage rate, $92,000 median household income, and a record setting April median detached sales price of $975,000, the monthly housing payment is 60% of a homeowner’s monthly paycheck. That is way too high for the average home buyer.
The current active inventory continued to surge higher.
The active listing inventory surged higher, adding 320 homes in the past couple of weeks, up 12%, and now sits at 2,968 homes, its highest level since last August. With diminished demand, the inventory has swelled by 115% since the start of the year, adding 1,714 homes in the first five months of the year. At this rate, the inventory will rise to nearly 5,000 when it peaks between October and Thanksgiving. Last year in October there were approximately 4,000 homes available. Normally the inventory peaks during the summer, but it will be delayed due to overpriced homes accumulating on the market without success. The 5,000 level will be the highest level since 2019, but will still be shy of the 3-year October average prior to COVID (2017 to 2019) of 7,034 homes. Nonetheless, there will be a lot more homes on the market later this year and it will be matched up against muted demand.
Demand dropped by 2% in the past couple of weeks.
Demand, a snapshot of the number of new escrows over the prior month, decreased from 2,651 to 2,611 in the past couple of weeks, down 40 pending sales, or 2%. Typically demand reaches a peak by now, between April and May, and is on the decline. This year it peaked early on March 17th due to the higher interest rate environment and has fallen by 6% since. In June, housing transitions to the Summer Market, where demand slowly diminishes. The distractions of summer, from heading to the beach to family vacations, will slowly cool demand further from the spring heights.
With the supply surging higher and demand falling, the Expected Market Time (the number of days to sell all San Diego County listings at the current buying pace) increased from 30 to 34 days in the past couple of weeks, its highest level since January of last year. At 34 days it remains an insane, Hot Seller’s Market (less than 60 days) where there are plenty of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are still rising rapidly; BUT, the number of multiple offers is dropping and it is taking longer to sell for many. Last year the Expected Market Time was at 21 days, faster than today. The 3-year average prior to COVID was at 55 days, substantially slower than today and a Hot Seller’s Market (between 40 and 60 days).